Companies make investment and operation decisions each day as they carry out their business. As companies expand internationally, they will most likely enter into business transactions that are denominated in a foreign currency, or a currency that is different than that of the company. The value of these foreign currency denominated business transactions changes in relationship to the currency of the parent company (or the owning subsidiary) each day they are outstanding, given that the exchange rate between the two currencies (transaction currency and company/subsidiary currency) changes 24 hours per day with the movement of the inter-bank foreign currency market. Thus, a company may realize an economic loss or economic gain based solely on the movement in the foreign currency market between the date of purchase/sale and date of payment/collection or conversion.
The potential loss or gain realized by movement in the foreign currency market results in an uncertainty or a risk that most companies would like to manage to the extent possible. However, the risk or uncertainty increases as a company expands further internationally, and increases the number and amount of foreign currency exposure relationships.
As the amount of the foreign currency exposure increases, companies assess whether they are comfortable with the exposure. If they are not comfortable, they generally begin to implement foreign currency risk management programs aimed at reducing the exposure. Exposure reduction may be accomplished by currency conversion or the use of foreign currency derivative instruments. For example, a company may enter into hedges by purchasing foreign currency forward contracts or foreign currency option contracts. A hedge reduces the risk of economic loss associated with a foreign currency exposure.
However, many exposure reduction actions may have an associated cost to perform the action (e.g., a net cost to enter a hedge contract). Additionally, the risk of a currency exposure is not necessarily equal across currencies; rather, risk associated with currency exposure can vary significantly based on volatility in the foreign currency inter-bank market associated with the currencies of the exposure. For example, the risk inherent in EUR-USD may be 12.3% while the risk inherent in USD-HKI) may be less than 0.5% (because HKI) is tied to or pegged to USD). The inherent risk is represented by a volatility factor that indicates how likely it is that a change in the exchange rate between the currencies will happen. Thus, the volatility associated with a currency exposure may be represented with a value-at-risk (VaR) methodology or other methodologies known in the art.
A company may not be able to perform all actions necessary to reduce foreign currency exposure, and performing all actions may not be necessary to bring foreign currency exposure within a tolerable risk for the company. However, it is difficult to determine what actions are “better” to perform than other actions, or which actions may be worth the cost of performing. Presently there are no tools to allow evaluation of foreign currency exposure reduction actions, especially to evaluate how each potential reduction action may compare to other possible actions, in a way that would allow a user to determine what actions would be preferred, or choosing to perform one action over another.
Descriptions of certain details and implementations follow, including a description of the FIGS., which may depict some or all of the embodiments described below, as well as discussing other potential embodiments or implementations of the inventive concepts presented herein. An overview of embodiments of the invention is provided below, followed by a more detailed description with reference to the drawings.